Economists agree that payday loans are a helpful financial tool.
There are a lot of well-intentioned individuals and organizations that seek to protect consumers from shady businesses. A frequent target of these watchdogs is payday lenders.
Criticism of the industry runs the gamut from simple awareness all the way to comparing payday lenders to being the worst of all players in the financial industry, with the latter being done by otherwise responsible organizations like the American Association of Retired People (AARP).
Such an exaggeration is not only unnecessary, but unfounded.
Yes, there are some companies out there that seek to take advantage of consumers, but they are not at all limited to the payday loan industry. In the barrel that is payday lending, as with any type of business, you’ll find a few bad apples and critics have an easy time plucking them out. Then they go as far as to suggest the whole barrel should be done away with.
The problem is, people like using the payday loans provided by responsible lenders, and there are several studies to prove it.
Most view payday loans as just another arrow in their financial quiver, and prefer to have it as an option. Other studies show that there is definite need for payday loans– at least those provided by reputable lenders.
The Community Financial Services Association of America, or CFSA, is a trade group made up of responsible payday lenders. A study by Harris Interactive, commissioned by the CFSA, showed that borrowers who used the services of member organizations understood the risks and the availability of other options. Among the key findings:
- 97% of borrowers agreed that loan terms and costs were clearly explained to them.
- 97% reported that payday loan terms and costs were as, or better than expected.
Additionally, customers also thought carefully about taking out a payday loan, and analyzed the costs.
- 93% carefully weighed the risks and benefits of taking out a payday loan before doing so
- 89% did the math on the overall cost they would incur by taking out a payday loan
The study reinforces the idea that payday loans are a useful financial tool when used responsibly, and when provided by reputable lenders like those in the CFSA.
The study also looked at how customers felt about alternatives to payday loans. Even with other options available, a payday loan was deemed the best choice by respondents. Only 8 percent of survey respondents said they had no other choice. Additionally, 68 percent of borrowers preferred a payday loan over late fees, overdraft fees, or other options.
That’s less surprising when some of the alternatives are examined closely. For example, 27 percent of borrowers had pawned something of value in the past, but 31 percent decided a payday loan was a better choice. Going to a pawn shop requires having something of value that you can afford to potentially part with. Also, the rates charged by pawn brokers are very close to that of payday lenders, according to a story on NPR’s Planet Money podcast. With a payday loan however, the borrower doesn’t risk losing a valued or necessary possession.
Avoiding bank overdraft fees was another reason borrowers opted to take out a payday loan, though they had opted to take that hit in the past. Even with new federal regulations designed to protect consumers, overdraft fees and confusion about how they work continue to plague consumers. Many report being charged repeatedly for a single overdraft occurrence according to Bankrate.com.
Many borrowers, 67 percent of them in fact, had also cut spending in the past or done without necessities, but when faced with a new short-term financial dilemma, 59 percent opted for a payday loan.
While protecting consumers is important, those that take out payday loans are educated about the process, the cost, and the alternatives. Most view payday loans as just another arrow in their financial quiver, and prefer to have it as an option. Other studies show that there is definite need for payday loans– at least those provided by reputable lenders.
Consider the study conducted by Professor Adair Morse at the University of Chicago Booth School of Business that found payday loans served a positive purpose in areas hit by natural disasters. In areas where these short-term loans were available, disaster victims fared better than their counterparts in areas where such loans were not available.
“Right before hurricane Katrina hit, there was an individual that called in and was loading his livestock on a U-Haul,” says Stacy Link a customer service supervisor for Check ‘n Go online in Cincinnati. “As he was talking, you could hear the wind in the background. It was pretty fierce. You could hear all the livestock, so through the whole call we had all this noise interruption, but we worked it all out and were able to get him the loan and we got him the same day funding so he was able to put gas in the U-Haul, pack his family up and get to hotel.”
Another interesting finding of the study was the discovery that people in areas where payday loans were available, were less likely to have to be treated for drug and alcohol abuse. This could be due to lower levels of stress over dealing with sudden financial emergencies.
Toward that end, many argue that payday lenders should be an available option to consumers and that eliminating them as a choice for consumers in a financial bind does more harm than good. Economist Tom Lehman of the Ludwig von Mises Institute in his paper “In Defense of Payday Lending,” reasons that without the option of payday loans, strapped consumers could be driven to illegal sources for cash. Writing on the Marketplace website, he adds that while he and those who agree with him are not defending payday lenders directly, “we are, instead, defending the right of individuals to make voluntary choices in the marketplace given their unique situation. The defenders of payday lending argue that financial resources are more productively employed when they are allocated by the voluntary forces of supply and demand. Critics of payday lending mostly reject market verdicts.”
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